Taxes! At first sight, no one really desires to talk, read or even listen about it.
Yes, everyone knows about them and complies with them (or should do so!), but it probably isn’t one’s favourite subject! But everyone has to deal with it. And for digital nomads, this is even more important, given that they need to be aware to fully comply.
Undoubtedly, remote work for digital nomads is way more than just a trend. This is the new go-to option for many professionals around the globe. Mainly because of its freedom and advantages: it allows them to work anywhere in the world, they save time on commuting, they feel more productive, they achieve a higher work-life balance and they can save money. How great is that?!
But, hold your horses! Such freedom brings (of course!) responsibilities. Meaning: tax concerns! But no worries. We got your back, and we’ll tell you why remote work taxes are important for digital nomads and how to stay compliant no matter where you are located.
Digital nomads’ taxes: the logistics behind
There’s a romanticised version of remote work for digital nomads. An idyllic scenario where a professional just grabs their bags and travels around the world, working where it feels the best.
But let’s face it. There’s more to it than just choosing a destination and enrol on the path of becoming a digital nomad. When onboarding on this career path, you must cover certain logistics, such as banking or taxes.
Being taxes the prominent issue, let’s dive in.
First of all, on to the big question: where should digital nomads pay their taxes?
Summing up, remote workers must file taxes in their tax residence country. This is defined as the principal residence or usual abode. Digital nomads might face a few extra layers, given that they are physically located in other countries during the fiscal year, so this means that local taxes might also be applied.
Bear in mind that, for digital nomads working from a different country, for a certain extent of time, requires some preparation and – most likely – a visa, whether it’s a shorter visa, or a work visa. In some cases, these professionals can apply for a digital nomad visa (which is a specific work visa for – you guessed it right – digital nomads). Portugal, for instance, being an increasingly WFH (work-from-home) destination of choice, even allows for remote workers to apply for a D7 Visa & Residence Permit, available for non-EU citizens with a passive income or a remote job. This allows these digital professionals to extend their stay for a year a bit longer. They can also apply for a Non-Habitual Resident (NHR) status, which is a special income tax regime with some quite attractive tax benefits (read about it here).
Why are we mentioning the Visa’s typologies? Easy: it will determine the tax responsibilities you must comply with, as well as the kind of work you can do while living in a certain country and the restrictions you might face.
Let’s consider these scenarios (and by that, we mean different countries), as examples:
- USA: foreigners working over there must file a specific IRS form, the Form 1042 – the Annual Withholding Tax Return for U.S. Source of Income of Foreign Persons. This form ensures foreign contractors (such as digital nomads) don’t commit any kind of tax violation and declare their income while working in US territory;
- Germany: for those who intend to work on German soil, they must get a German Employment Visa, to be declared a tax resident.
- Mexico: a Temporary Resident Visa with a work permit is in order. Foreigners must apply for this temporary visa and must attach a work permit to allow them to stay there for a period of six months and perform paid activities.
These are just three examples. Depending on the country a digital nomad is moving to, it’s important to be properly informed of the applicable rules and to make sure to comply with them.
So, do digital nomads have to pay taxes in the destination country?
Simply put: yes!
Digital nomads want to make the most out of this remote experience, so the best thing to do is to follow the rules.
As previously stated, most countries establish different types of visas, which define the tax indexation for foreigners. This depends, mostly, on how long they stay in the country. In some cases, there are rules determining how long can a foreigner be living in the country before starting to pay taxes (usually they have to pay if the stay goes up for more than six successive months in a year).
The most important thing to do is to research the applicable rules in the destination country. Keep in mind that this is not just about travelling and experiencing different cultures and having a broader professional experience and background. There are legal obligations to follow to avoid some negative (and expensive) consequences.
Are digital nomads going to be taxed twice?
Well, some good news here. Digital nomads might be freed from double taxation.
Countries have been working on this. In Europe, the member states have created treaties to avoid double taxation. The same goes for the USA, which has income established the same tax treaties with several foreign countries.
These agreements define many exceptions for professionals working and living abroad, in order to reduce their tax rates.
What can happen if digital nomads skip remote work taxes?
You probably have guessed by now, but here is a list of the consequences digital nomads might face by not declaring and paying remote work taxes:
For those who don’t communicate their tax-residency status and income, double taxation can happen. So, they’ll pay both in the home country and the working one.
Fines and late fees
This depends on the country digital nomads are located in. But, depending on the tax amount, they might have to pay penalty interest fines or late fees (and it tends to be quite high, so it’s better to avoid that).
Get a criminal record
Tax evasion, fraud. Have you ever heard about these? Well, those who don’t comply with tax laws, might face some criminal charges and even face prison time.
Say: Hi, no more!
The no-compliance with the local tax laws might result in a ban from the country, at least until you pay what you owe.
Remote work taxes: why they are important for digital nomads?
Don’t you have enough reasons already?
In the end, by being informed and complying with the local tax rules, digital nomads have the tools to be successful and even save money, while living abroad.
And no worries! Even if it seems quite hard to follow and hard to understand, there are some solutions.
The easiest one: hire a local accountant to help you with everything. This will make your life so much easier.
The other go-to solution is, for instance, to look for jobs in companies operating under an Employer of Record (EOR), which will handle the legal part of it both for companies and for employees and will with the local labour laws.
In the end, taxes are a part of the job. It might seem one, but it’s far from being the bogeyman. Just face it!
Meanwhile, if you’re looking for job opportunities for digital nomads, find here a complete list of options.